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Lesson - 1
Business Economics- Meaning, Nature, Scope and significance
Introduction and meaning :
(Author : Dr. M.S. Khanchi)
Business Economics, also called Managerial Economics, is the
application of economic theory and methodology to business. Business involves
decision-making. Decision making means the process of selecting one out of
two or more alternative courses of action. The question of choice arises because
the basic resources such as capital, land, labour and management are limited
and can be employed in alternative uses. The decision-making function thus
becomes one of making choice and taking decisions that will provide the most
efficient means of attaining a desired end, say, profit maximation.
Different aspects of business need attention of the chief executive. He
may be called upon to choose a single option among the many that may be
available to him. It would he in the interest of the business to reach an optimal
decision- the one that promotes the goal of the business firm. A scientific
formulation of the business problem and finding its optimals solution requires
that the business firm is he equipped with a rational methodology and
appropriate tools.
Business economic meets these needs of the business firm. This is
illustrated in the following presentation.
Economic
Theory and
Methodology
Decision
problems in
Business
Business Economic
Application of Economic
Theory and Methodology to
solving Business problems

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Optimal Solution
to Business
Problems
it may be that business economics serves as a bridge between economic
theory and decision-making in the context of business.
According to Mc Nair and Meriam, “Business economic consists of the
use of economic modes of thought to analyse business situations.”
Siegel man has defined managerial economic (or business economic) as
“the integration of economic theory with business practice for the purpose of
facilitating decision-making and forward planning by management.”
We may, therefore, define business economic as that discipline which
deals with the application of economic theory to business management.
Business economic thus lies on the borderline between economic and business
management and serves as a bridge between the two disciplines.
Nature of Business Economics :
Traditional economic theory has developed along two lines; viz.,
normative and positive. Normative focuses on prescriptive statements, and help
establish rules aimed at attaining the specified goals of business. Positive, on
the other hand, focuses on description it aims at describing the manner in which
the economic system operates without staffing how they should operate.
The emphasis in business economics is on normative theory. Business
economic seeks to establish rules which help business firms attain their goals,
which indeed is also the essence of the word normative. However, if the firms
are to establish valid decision rules, they must thoroughly understand their
environment. This requires the study of positive or descriptive theory. Thus,
Business economics combines the essentials of the normative and positive
economic theory, the emphasis being more on the former than the latter.
Scope of Business Economics :

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As regards the scope of business economics, no uniformity of views
exists among various authors. However, the following aspects are said to
generally fall under business economics.
1.
Demand Analysis and Forecasting
2.
Cost and production Analysis.
3.
Pricing Decisions, policies and practices.
4.
Profit Management.
5.
Capital Management.
These various aspects are also considered to be comprising the subject
matter of business economic.
1.
Demand Analysis and Forecasting :
A business firm is an economic organisation which transform productive
resources into goods to be sold in the market. A major part of business decision
making depends on accurate estimates of demand. A demand forecast can serve
as a guide to management for maintaining and strengthening market position
and enlarging profits. Demands analysis helps identify the various factors
influencing the product demand and thus provides guidelines for manipulating
demand.
Demand analysis and forecasting provided the essential basis for
business planning and occupies a strategic place in managerial economic. The
main topics covered are: Demand Determinants, Demand Distinctions and
Demand Forecastmg.
2.
Cost and Production Analysis :
A study of economic costs, combined with the data drawn from the
firm’s accounting records, can yield significant cost estimates which are useful
for management decisions. An element of cost uncertainty exists because all the
factors determining costs are not known and controllable. Discovering

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economic costs and the ability to measure them are the necessary steps for more
effective profit planning, cost control and sound pricing practices.
Production analysis is narrower, in scope than cost analysis. Production
analysis frequently proceeds in physical terms while cost analysis proceeds in
monetary terms. The main topics covered under cost and production analysis
are: Cost concepts and classification, Cost-output Relationships, Economics and
Diseconomics of scale, Production function and Cost control.
3.
Pricing Decisions, Policies and Practices :
Pricing is an important area of business economic. In fact, price is the
genesis of a firms revenue and as such its success largely depends on how
correctly the pricing decisions are taken. The important aspects dealt with under
pricing include. Price Determination in Various Market Forms, Pricing Method,
Differential Pricing, Product-line Pricing and Price Forecasting.
4.
Profit Management :
Business firms are generally organised for purpose of making profits and
in the long run profits earned are taken as an important measure of the firms
success. If knowledge about the future were perfect, profit analysis would have
been a very easy task. However, in a world of uncertainty, expectations are not
always realised so that profit planning and measurement constitute a difficult
area of business economic. The important aspects covered under this area are :
Nature and Measurement of profit, Profit policies and Technique of Profit
Planning like Break-Even Analysis.
5.
Capital Management :
Among the various types business problems, the most complex and
troublesome for the business manager are those relating to a firm’s capital
investments. Relatively large sums are involved and the problems are so
complex that their solution requires considerable time and labour. Often the
decision involving capital management are taken by the top management.
Briefly Capital management implies planning and control of capital